Questar Corporation (STR)

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Questar (STR)

Q2 2013 Earnings Call

August 01, 2013 9:30 am ET

Executives

Kevin W. Hadlock - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Ronald W. Jibson - Chairman, Chief Executive Officer, President, Chief Executive Officer of Questar Gas Company, Chief Executive Officer of Wexpro, President of Questar Gas Company and President of Wexpro

R. Allan Bradley - Executive Vice President, Chief Executive Officer Questar Pipeline and President of Questar Pipeline

Analysts

Timm A. Schneider - Citigroup Inc, Research Division

Danilo Juvane

Presentation

Operator

Good morning, ladies and gentlemen. My name is Aaron, and I'll be your operator today. At this time, I would like to welcome everyone to the Questar Corporation's Second Quarter 2013 Earnings Release Conference Call. [Operator Instructions] I'd now like to turn the call over to Mr. Kevin Hadlock. Mr. Hadlock, you may begin your conference.

Kevin W. Hadlock

Thank you, Aaron. Good morning, everyone, and thank you for joining us for Questar's second quarter 2013 earnings conference call. I am Kevin Hadlock, Questar's Chief Financial Officer. With me today are Ron Jibson, Chairman, President and CEO of Questar Corporation; Jim Livsey, Executive Vice President and COO of Wexpro; Allan Bradley, President and CEO of Questar Pipeline; and Craig Wagstaff, Executive Vice President and COO of Questar Gas. During this call, we'll be referring to our second quarter 2013 earnings presentation that can be found on our website at www.questar.com.

Moving to Slide 2. Before we begin, let me remind you that we will be making forward-looking statements during our call today and actual results could differ from our estimates for a variety of reasons that we described in our SEC filings. Also, this call may reference non-GAAP financial measures. Our slides in the appendix of the presentation provide reconciliations to these measures.

Let's begin with a review of the second quarter on Slide 4. Yesterday, we reported second quarter 2013 net income of $39.4 million or $0.22 per diluted share, in line with last year's results. Adjusted EBITDA was strong in the second quarter, totaling $122.7 million, an increase of about 1% compared to last year's second quarter. Despite inflationary cost pressures, combined O&M and G&A expense was flat compared to second quarter of 2012. Capital investment for the first 6 months of 2013 was $192.9 million, an increase of 1% compared to the prior year.

Turning to Slide 5. All business units performed as expected in the second quarter. Consolidated net income was up slightly, with earnings per share equal to last year's second quarter. Corporate and other operations reported a net loss of $2.3 million in the second quarter of 2013 compared to a net loss of $400,000 in the second quarter of 2012. This increase was driven by higher estimated state income tax and higher mark-to-market valuations on deferred compensation.

Moving to Slide 6. Questar Gas, our retail gas distribution utility, showed a $1 million increase in gross margin during the second quarter to $56.7 million. Adjusted EBITDA was higher by $1.4 million. Questar Gas recognize a seasonal net loss of $1.2 million, which improved by $1.1 million compared to the same period last year. This improvement was due to higher recovery of the infrastructure replacement investment and customer growth. Questar Gas' capital investment in the second quarter was $42.4 million, an increase of $1.3 million compared to the second quarter of 2012.

Turning to Slide 7. Wexpro, our cost-of-service natural gas development company, grew adjusted EBITDA to $63 million, up $3.4 million or about 6% compared to the same period last year. Net income was up $2.6 million to $28.4 million, an increase of 10% over the second quarter of 2012. These results were driven largely by a higher 12-month average investment base, which increased $47.1 million, and higher oil and natural gas liquids revenues. Wexpro invested capital of $45.8 million in the second quarter, up $15.2 million compared to last year's second quarter.

Moving to Slide 8. Revenue at Questar Pipeline, our interstate natural gas pipeline and storage business, was down $3.7 million in the second quarter, primarily due to lower revenues from natural gas liquids. Questar Pipeline earned net income of $14.5 million, down $1.6 million versus the second quarter of 2012. Capital investment in the second quarter was $18.2 million, which was $5 million higher than the prior year.

Moving to Slide 9. With regard to costs, Questar's consolidated operating and maintenance costs in the second quarter were down $2.1 million compared to the same period last year, due largely to lower Questar Gas demand side management cost and lower Questar Pipeline outside maintenance.

General and administrative expenses were up $2.1 million, primarily due to higher employee-related costs. Production and other taxes were $2.1 million higher, driven by higher gas prices and volumes at Wexpro and higher Questar Gas property taxes.

Depreciation in the second quarter of 2013 was up $2 million compared to the same period last year due to higher capital investment. Consolidated interest expense was slightly lower due to the replacement of Questar Gas' debt at lower interest rates than in the second quarter of 2012.

Turning to Slide 10. The company continues to generate strong cash flow. For the first 6 months of 2013, operating cash flow before working capital changes totaled about $275 million, an increase of about 1% compared to the first 6 months of 2012. At the end of the quarter, Questar had net available liquidity of $544 million in unused commercial paper capacity. Subsequent to the quarter end, Questar Gas priced a total of $150 million of 30-year and 35-year private placement notes. These notes will be issued on a delayed draw basis in December this year. The coupon rate for both tranches of debt averages 4.8%.

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